The following definitions provide examples for illustrative purposes only. For details on an investment opportunity, please consult the Offering Document under the "Documents" section on the campaign page.
Equity
(i.e. common shares and preferred shares)
Direct ownership in a company. This is the most straightforward and common form of financing that companies will seek.
E.g. If my company was valued at $1,000,000 and someone invested $100,000, that investor would own 9.1% of the company ($100,000 investment divided by the new value of the company, $1,100,000).
Using industry terms, we would describe this deal as follows:
The company’s pre-money valuation is $1,000,000 (value before new money)
The company’s post-money valuation is $1,100,000 (value after new money)
The company has sold 9.1% of its equity
Convertible Note
A convertible note is often used by early-stage companies. The main reason for its use is that a valuation of the company is not required. Convertible notes will convert into shares upon the occurrence of a defined conversion event. Usually, this event is a priced round (i.e., where the valuation is determined) and it may be subject to a threshold to a minimum offering (e.g., at least $2MM). If a conversion event does not occur, the principal amount and any accumulated interest converts into shares at the end of the term through a manner described in the convertible note agreement. If the company has the option to pay the gross amount in cash rather than convert into equity shares, it will be noted in the convertible note.
A convertible note will typically contain the following terms:
Valuation cap: As an early stage company, pinning down an accurate valuation can be an impossible task. Rather, the company sets a ‘valuation cap’ - this sets the maximum value that the investment can be ‘converted’ against. Investors stand to benefit if the conversion event financing is at a valuation higher than the valuation cap.
Discount rate: In the event that the valuation of the priced round is below the valuation cap, or that conversion against the valuation cap would result in less shares being issued, convertible shares are converted at the share price in the priced round, less the discount rate.
Interest rate: The rate at which the principal investment grows. The aggregate amount of the note, comprised of the principal amount and any accumulated interest, is the amount that is subject to conversion.
SAFE (Simple Agreement for Future Equity)
As stated in its name, this investment is not for equity - rather, future equity. It is similar to a convertible note in that investors benefit from the discount rate applied to their share price upon a conversion, however, it differs in some key ways.
As a SAFE holder, you are not a shareholder nor are you afforded any rights as a debt holder like convertible debt holders. Typically, SAFEs do not pay interest. Conversion events may not be subject to a minimum, but may require a certain security issuance (e.g., preferred shares).
E.g. You buy a SAFE today offering a discount of 20%, and in 1 year the company does a Common Share round, selling Shares for $1/share. Your SAFE would convert into shares at $0.80/share ($1 x 80%). An investment of $1,000 in a SAFE would give you 1250 shares vs. 1000 shares if bought during the common share round. This example is for illustrative purposes only.
Units
A unit is a composition of multiple securities, combined into one security - a Unit. A single unit can house any number of securities. In almost all cases, it is much simpler than that.
A common unit structure is one share and a ½ warrant. For every two units, an investor, having one whole warrant, would have the right to purchase one additional share, per the terms of the warrant.
Warrants
A warrant provides the right, but not the obligation, to purchase a share at a specified price within a specified time frame. Regardless of the future price of the share, upon exercise of the warrant, the holder will be able to purchase it at the warrant ‘strike price’ - thus, it is only of value when the share price exceeds the warrant strike price.
You may be thinking - you are just describing an option! Yes, they are very similar. The difference lies in who they are issued to - options are typically reserved for employees; warrants are for investors.
Generally warrants are issued as part of a Unit security.